The present invention relates a commission management system, more particularly a commission management system for managing soft dollar and commission recapture services.
Successful investing in stocks and bonds can be viewed very simply as a combination of buying a “good thing” and doing a good job negotiating the purchase. Since the processes of deciding what's “good” and executing the transaction well can require complex research and professional trading skills, many investors rely on professional money managers to decide the “what” and professional traders (chosen by the money manager) to handle the transaction.
Historically, many brokerage firms have provided the investor with research to aid the investment decision and trading skill to execute the transaction in return for a commission. So, as a logical construct, the commission a broker is paid has a component associated with providing research and advice to the client and a component associated with performing the trade. Research is the foundation of the money management industry. Soft dollar arrangements developed as a link between the brokerage industry's supply of research and the money management industry's demand for research.
Brokerage firms typically provide a bundle of services including research and execution of transactions. The research provided can be either proprietary or third party. Because commission dollar pay for the entire bundle of services, the practice of allocating certain of these commission dollars to pay for the research component has come to be called “soft dollars”.
Since the early days of the brokerage industry, full-service brokerage firms (i.e., broker-dealers) have provided research and other services to customers in addition to executing trades as part of an overall package of services provided to customers. The costs of these services generally are not separately itemized or billed to customers of brokerage firms, but are considered part of the overall services. Customers have always paid for this in-house (or proprietary) research, as well as other services, with commissions.
As market forces and the regulations surrounding investing have evolved, some brokerage firms remain in both the advice business and the trading business. Other brokerage firms opted to focus their resources on trading expertise only, providing their clients the opportunity to purchase third-party independent research to aid their investment decisions. The cost of third-party research is more easily quantifiable than the cost of proprietary research. To be within the safe harbor of research under Section 28(2) of the Exchange Act, the research must be “provided by” the broker. The research may be delivered directly to the adviser by the third party research provider, but the broker must be obligated to pay for the research services. However, if the client, such as plan sponsors, foundations, etc., does not require or require minimal research advice or services from the brokerage firms, the client can typically recapture the advice/research portion of the commission. That is, commission recapture programs in effect permit the client, instead of the adviser, to reap the benefit of the cost of soft dollars built into the institutional brokerage commissions. However, many advisers lack centralized management or control over the receipt of products and services for soft dollars. Typically, soft dollar decision-making occurs in an uncoordinated fashion at several functional levels.
Therefore, it is desirable to have a commission management system for managing these various soft dollar and commission recapture arrangements. The commission management system of the present invention provides a centralized management and control over the receipt of products and services (i.e., research) for soft dollars.